Agricultural Income Tax

jan 21st

interesting and unusual topic. certainly there are some very rich 'farmers' in kerala -- mostly christists who grabbed public land and got KM Mani to bless these with official grant deeds. and they have huge plantations on which they pay no taxes.

---------- Forwarded message ----------
From: Benjamin P 


POLITICS OF AGRICULTUAL INCOME TAX*

(Vijay Times, Jan. 18, 2006)

P.N.BENJAMIN

The image of a farmer that conjures up in our mind is that of a poor man in
tatters living in a mud house with a large family, heavily indebted and
barely able to make both ends meet. But, over the years, and with facilities
offered by the government, that image has changed. There are on the
contrary, farmers who are not only well off but are wealthier than many
businessmen. And yet they do not pay any income tax.

Not that there are no farmers who fit into this description now. And the
poor farmer in his tatters, cultivating the small plot of land inherited
from his forefathers, is not going to pay any tax in any case. Perhaps,
their number was too large and the government of the day may have thought
that no worthwhile revenue will come by imposing income tax on agricultural
income.

One of the norms of taxation, according to economists, is the ability of the
taxpayer to pay. The case for direct taxation of agriculture rests on the
fact that this sector of the economy is under-taxed. Economists have
empirically demonstrated that the tax burden on the Indian agricultural
sector is much lower than that on the non-agricultural sector and that
inter-class inequity in tax burdens exists between the two sectors. The
disparity becomes yet more glaring when we note that agriculture receives in
public expenditures more than it pays in taxes while for the
non-agricultural sector as a whole in the situation is quite the reverse.

There are farmers who are not only well off but are wealthier than many
businessmen. And yet, they do not pay any income taxes. They get away
without paying anything at all. It is partly the absence of tax that has
allowed the farmers to get rich at the cost of the exchequer.  The exemption
of agricultural income from income tax means that the exchequer is deprived
of a large chunk of revenue, besides making the tax system inequitable.

A survey made by the National Council of Applied Research some time ago
revealed that nearly 80 per cent of the cultivator households are poor and
cannot provide any support to the budget. It is the top eight per cent of
the household in the agricultural sector that can make all the difference.
They are in the upper middle or high- income bracket and their number
exceeds 45 lakhs.

The rich agriculturists are not contributing to the national exchequer in
the form of income tax. They have enriched themselves by cornering the
enormous benefits emanating from the massive doses of infrastructure
investments as well as incentives to use fertilisers, to irrigate land, and
assured minimum price for his product so that he could plan his crops and
derive the maximum benefit from cultivation. The inputs were subsidised and
the output was overpriced.

What would be the budget gain if agricultural income were subject to income
tax the same way other incomes are? Taxes are paid by households in the
high-income bracket. As such, the gain to the budget would be in the same
proportion as the number of agricultural households in the high-income
bracket. That number is more than 25 per cent. It is the rest 75 per cent
that has generated the income tax revenue for the government. With the
present rates the exchequer should be able to mop up an estimated additional
Rs.1, 00,000 crores after the extension of income taxes to agriculture.
Exemption of agricultural income from taxation is thus a heavy loss to the
exchequer and a great inequity in the tax system. So much for the economics
of agricultural taxation.

Clearly a small section of the agricultural population has the ability to
pay taxes. Why does not the government make them pay income tax? This brings
us to the politics of agricultural taxation. The problem is not that the
government is not convinced that the farmer too must make his contribution
to the budget but lacks political will to make the change. The farmer is the
biggest vote bank and any government that annoys him is unlikely to be
looked upon with sympathy. But the absence of tax has created islands of
opulence within the agricultural sector and it is time that someone develops
the nerve to initiate a bold programme, which ends discrimination among
taxpayers.

Under the Constitution agricultural taxation falls in the State List. It is
under the purview of the respective State governments to levy agricultural
taxation. Though in some States, attempts have been made in the past to
introduce agricultural income tax, the instances are few and far removed.

The governments have not been too eager to introduce agricultural income tax
for that would mean alienation of the rural rich who dominate the
countryside and have considerable power and sway over the rural 'vote bank'
against anyone who antagonises them. And the successive governments at the
Centre, guided again and again by the same motive, have not been prepared to
take the erring States to task.

By not introducing agricultural income tax, our governments are playing to
the sectarian interests against the larger interests of society. But then in
politics, one has to appease dominant sections, even if the broader
interests of society have to be sacrificed. Otherwise one runs the risk of
being thrown out of power. And this is a fact not many politicians will
compromise with.

Way back in 1972, the government had appointed a committee to inquire into
the question of taxing agricultural income. The committee, which was headed
by Dr. K.N.Raj, made some very fine recommendations. Then came the Kelkar
committee in 2002. It recommended that the big farmers should be included
among those paying income tax. Mr. Kelkar said the agricultural income of
non-agriculturists was increasingly used as tax shields for laundering
funds. To tax these incomes, the states could pass a resolution under
Article 252 of the Constitution authorising the Centre to impose tax on
agricultural income. All such taxes collected by the Centre could be
assigned to the states Needless to add, the government did not act on the
recommendations.

P.N.BENJAMIN
benjaminpn@hotmail.com